All references to "Notes" herein are to Notes to Consolidated Financial
Statements contained in this report. Information is not presented on a
reportable segment basis in this section because in the Company's judgment such
discussion is not material to an understanding of the Company's business.
In addition to historical information, this Report contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements are based on management's current expectations about its
businesses and the markets in which the Company operates. Such forward-looking
statements are not guarantees of future performance and involve known and
unknown risks, uncertainties or other factors which may cause actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Actual operating results may be affected by various
factors including, without limitation, changes in international, national and
Hawaiian economic conditions, competitive market conditions, uncertainties and
costs related to the imposition of conditions on receipt of governmental
approvals and costs of material and labor, the effect of the outbreak of the
COVID-19 virus, and actual versus projected timing of events all of which may
cause such actual results to differ materially from what is expressed or
forecast in this report.
Liquidity and Capital Resources
Certain subsidiaries of Kaanapali Land are jointly indebted to Kaanapali Land
pursuant to a certain Secured Promissory Note in the principal amount of $70
million dated November 14, 2002, and due September 30, 2029, as extended. Such
note had an outstanding balance of principal and accrued interest as of
December 31, 2020 and 2019 of approximately $90 million and $89 million,
respectively. The interest rate currently is 0.39% per annum and compounds
semi-annually. The note, which is prepayable, is secured by substantially all of
the remaining real property owned by such subsidiaries, pursuant to a certain
Mortgage, Security Agreement and Financing Statement, dated as of November 14,
2002 and placed on record in December 2002. The note has been eliminated in the
consolidated financial statements because the obligors are consolidated
subsidiaries of Kaanapali Land.
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In addition to such Secured Promissory Note, certain other subsidiaries of
Kaanapali Land continue to be liable to Kaanapali Land under certain guarantees
(the "Guarantees") that they had previously provided to support certain Senior
Indebtedness (as defined in the Plan) and the Certificate of Land Appreciation
Notes ("COLA Notes") formerly issued by Amfac/JMB Hawaii, Inc. (as predecessor
to KLC Land). Although such Senior Indebtedness and COLA Notes were discharged
under the Plan, the Guarantees of the Non-Debtor KLC Subsidiaries were not.
Thus, to the extent that the holders of the Senior Indebtedness and COLA Notes
did not receive payment on the outstanding balance thereof from distributions
made under the Plan, the remaining amounts due thereunder remain obligations of
the Non-Debtor KLC Subsidiaries under the Guarantees. Under the Plan, the
obligations of the Non-Debtor KLC Subsidiaries under such Guarantees were
assigned by the holders of the Senior Indebtedness and COLA Notes to Kaanapali
Land on the Plan Effective Date. Kaanapali Land has notified each of the
Non-Debtor KLC Subsidiaries that are liable under such Guarantees that their
respective guarantee obligations are due and owing and that Kaanapali Land
reserves all of its rights and remedies in such regard. Given the financial
condition of such Non-Debtor Subsidiaries, however, it is unlikely that
Kaanapali Land will realize payments on such Guarantees that are more than a
small percentage of the total amounts outstanding thereunder or that in the
aggregate will generate any material proceeds to the Company. These Guarantee
obligations have been eliminated in the consolidated financial statements
because the obligors are consolidated subsidiaries of Kaanapali Land, which is
now the sole obligee thereunder.
Those persons and entities that were not affiliated with a predecessor of the
Company and were holders of COLAs (Certificate of Land Appreciation Notes) on
the date that the Plan was confirmed by the Bankruptcy Court, and their
successors in interest, represent approximately 9.0% of the ownership of the
Company.
The Company had cash and cash equivalents of approximately $18 million and $23
million, as of December 31, 2020 and 2019, respectively, which is available for,
among other things, working capital requirements, including future operating
expenses, and the Company's obligations for engineering, planning, regulatory
and development costs, drainage and utilities, environmental remediation costs
on existing and former properties, potential liabilities resulting from tax
audits, and existing and possible future litigation. The Company does not
anticipate making any distributions for the foreseeable future.
The primary business of Kaanapali Land is the investment in and development of
the Company's assets on the Island of Maui. The various development plans will
take many years at significant expense to fully implement. Reference is made to
Item 1 - Business, Note 7 of the consolidated financial statements and the
footnotes to the financial statements. Proceeds from land sales are the
Company's only source of significant cash proceeds and the Company's ability to
meet its liquidity needs is dependent on the timing and amount of such proceeds.
The Company's operations have in recent periods been primarily reliant upon the
net proceeds of sales of developed and undeveloped land parcels.
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In September 2014, Kaanapali Land Management Corp. ("KLMC"), pursuant to a
property and option purchase agreement with an unrelated third party, closed on
the sale of an approximate 14.9 acre parcel in West Maui. The purchase price was
$3.3 million, paid in cash at closing. The agreement commits KLMC to fund up to
approximately $1 million, depending on various factors, for off-site roadway,
water, sewer and electrical improvements that will also provide service to other
KLMC properties. The purchaser was also granted an option for the purchase of an
adjacent site of approximately 18.5 acres for approximately $4.1 million, of
which $525 thousand was paid in cash upon the closing of the 14.9 acre site. The
option expired on December 31, 2020, and the nonrefundable $525 thousand option
payment is included in Other income on the Company's Consolidated Statement of
Operations as of December 31, 2020. The 14.9 acre site is intended to be used
for a hospital, skilled nursing facility, assisted living facility, and medical
offices.
During the first quarter of 2006, the Company received final subdivision
approval on an approximate 336 acre parcel in the region "mauka" (toward the
mountains) from the main highway serving the area. This project, called
Kaanapali Coffee Farms, consisted of 51 agricultural lots, offered to individual
buyers. The land improvements were completed during 2008. As of December 31,
2020, the Company sold fifty lots at Kaanapali Coffee Farms including four lots
in 2018. In conjunction with the sale of one of the lots sold in 2018, in
addition to cash proceeds, the Company received a promissory note in the amount
of approximately $460 thousand. The Company received the proceeds of the
promissory note in October 2020.
The Company is in the planning stages for the development of a 295-acre parcel
in the region mauka of the Kaanapali Coffee Farms ("KCF Mauka"). The parcel is
to be comprised of 61 agricultural lots that will be offered to individual
buyers. The Company expects to develop the parcel in phases and all phases have
been submitted to the County for subdivision approval. Upon final subdivision
approval and receipt of final plat of the first phase from the County, which
requires a bond in the amount of the cost to develop the first phase, the
Company can pre-sell the undeveloped lots in the first phase. Although the
Company expects to market the lots in the first phase beginning in the second
half of 2021, various contingencies, including, but not limited to, governmental
and market factors and the availability of a bond to secure the first phase of
the development and the considerable uncertainty surrounding the COVID-19
pandemic and its continuing repercussions may impact the viability or timing of
the project. Therefore, there can be no assurance the Company will be able to
meet such timetable, that the subdivision will ultimately be approved or that
the lots will sell for prices deemed advantageous by the Company.
In January 2021, the Company entered into agreements with an unrelated third
party for that third party to prepare plans to develop Puukolii Village Mauka
and another subdivision on the Company's property. The plans are to include
development segments and timeline, offsite and onsite infrastructure,
construction cost analysis, proposed budgets and proforma financial statements.
If after discussion and negotiation the Company and the third party are unable
to agree on the plans, then either the Company or the third party may terminate
the agreements.
The Commission on Water Resource Management ("CWRM") consists of approximately
seven members appointed by the governor and confirmed by the Hawaii State
Senate. CWRM assists the state as trustee of water resources pursuant to the
state water code. CWRM exercises jurisdiction over land-based surface sources
and conducts water resource assessments and regulatory activities over, among
other things, freshwater streams throughout Maui. The Company is reliant on
water sourced from its irrigation systems which divert water from streams and
development tunnels into a system of ditches, tunnels, flumes, siphons and
reservoirs.
The Company does not consider the excess assets of the Pension Plan
(approximately $18 million) to be a source of liquidity due to the substantial
cost, including Federal income tax consequences, associated with liquidating the
Pension Plan.
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Although the Company does not currently believe that it has significant
liquidity problems over the near term, should the Company be unable to satisfy
its liquidity requirements from its existing resources and future property
sales, it will likely pursue alternate financing arrangements. However it cannot
be determined at this time what, if any, financing alternatives may be available
and at what cost.
In March 2020, the World Health Organization declared the outbreak of COVID-19
as a pandemic, and the U.S. and Hawaiian economy began to experience pronounced
disruptions. Quarantine, travel restrictions and other governmental restrictions
to reduce the spread of COVID-19 has caused and is likely to continue to have an
adverse impact on economic activity, including business closures, increased
unemployment, financial market instability, and reduced tourism to Maui. The
duration of this disruption on global, national, and local economic cannot be
reasonably estimated at this time. Therefore, while this matter will negatively
and materially impact our results and financial position, the related financial
impact cannot be reasonably estimated at this time. The Company continues to
monitor the economic impact of the COVID-19 pandemic, as well as mitigating
emergency assistance programs, such as the Coronavirus Aid, Relief and Economic
Security Act (CARES Act).
Results of Operations
Reference is made to the footnotes to the financial statements for additional
discussion of items addressing comparability between years.
2020 Compared to 2019
The decrease in other assets at December 31, 2020 as compared to December 31,
2019 is primarily due to proceeds received on a promissory note related to a lot
sale in 2018.
The decrease in deposits and deferred gains at December 31, 2020 as compared to
December 31, 2019 and the related increase in interest and other income for the
year ended December 31, 2020 as compared to the year ended December 31, 2019 is
primarily due to a nonrefundable option payment included in income when the
option expired at December 31, 2020.
The decrease in sales for the year ended December 31, 2020 as compared to the
year ended December 31, 2019 is primarily due to the negative impact on coffee
sales due to continued mandates including restrictions on travel, both
inter-island and trans-Pacific arrivals to the Hawaiian islands, and other
mandates negatively impacting business and the economy in Hawaii related to the
COVID-19 pandemic.
2019 Compared to 2018
The decrease in sales and the related decrease in cost of sales for the year
ended December 31, 2019 as compared to the year ended December 31, 2018 is
primarily due to no lot sales in 2019 as compared to four lots sold in 2018.
The increase in selling, general and administrative for the year ended
December 31, 2019 as compared to the year ended December 31, 2018 is due to the
settlement of a legal matter, an increase in legal fees related to state water
regulatory issues, and an increase in consulting services related to office and
development management.
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Critical Accounting Policies
The discussion and analysis of the Company's financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities. These estimates are based on historical
experience and on various other assumptions that management believes are
reasonable under the circumstances; additionally management evaluates these
results on an on-going basis. Management's estimates form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Different estimates could be made under
different assumptions or conditions, and in any event, actual results may differ
from the estimates.
The Company reviews its property for impairment of value. This includes
considering certain indications of impairment such as significant changes in
asset usage, significant deterioration in the surrounding economy or
environmental problems. If such indications are present and the undiscounted
cash flows estimated to be generated by those assets are less than the assets'
carrying value, the Company will adjust the carrying value down to its estimated
fair value. Fair value is based on management's estimate of the property's fair
value based on discounted projected cash flows.
There are various judgments and uncertainties affecting the application of these
and other accounting policies, including the liabilities related to asserted and
unasserted claims and the utilization of net operating losses. Materially
different amounts may be reported under different circumstances or if different
assumptions were used.
Pension assumptions are significant inputs to the actuarial models that measure
pension benefit obligations and related effects on operations. Two assumptions -
discount rate and expected return on assets - are important elements of plan
expense and asset/liability measurement. The Company evaluates these critical
assumptions at least annually. The Company periodically evaluates other
assumptions involving demographic factors such as mortality, and updates the
assumptions to reflect experience and expectations for the future. Actual
results in any given year will often differ from actuarial assumptions because
of economic and other factors.
Accumulated and projected benefit obligations are measured as the present value
of future cash payments. The Company discounts those cash payments using the
weighted average of market-observed yields for high quality fixed income
securities with maturities that correspond to the payment of benefits. Lower
discount rates increase present values and subsequent-year pension expense;
higher discount rates decrease present values and subsequent-year pension
expense.
The Company's discount rates for projected benefit obligations of the pension
plan at December 31, 2020, 2019 and 2018 were 1.95%, 2.93% and 3.96%,
respectively, reflecting market interest rates.
To determine the expected long-term rate of return on pension plan assets, the
Company considers current and expected asset allocations, as well as historical
and expected returns on various categories of plan assets. Based on our analysis
of future expectations of asset performance, past return results, and our
current and expected asset allocations, we have assumed a 6% long-term expected
return on those assets.
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